Albany International Corp. 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, including fourth-quarter results. Albany operates through two segments: Machine Clothing (MC), its established cash-generating business serving paper, packaging, nonwovens and building-products markets, and Albany Engineered Composites (AEC), which supplies advanced composite structures to aerospace and defense customers.
AEC’s principal growth program is the LEAP aircraft engine program, including composite fan blades and other components supplied through Albany Safran Composites, LLC. Safran acquired a 10% interest in that subsidiary in October 2013.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $757.4 million | $760.9 million | Down 0.5% |
| Gross profit | $290.6 million | $305.4 million | Down 4.9% |
| Gross margin | 38.4% | 40.1% | Down 170 bps |
| Operating income/(loss) | $52.1 million | $(44.1) million | Improved by $96.2 million |
| Income from continuing operations | $17.7 million | $(40.8) million | Returned to profitability |
| Net income attributable to the Company | $17.5 million | $31.0 million | Down 43.5% |
| Diluted EPS from continuing operations | $0.55 | $(1.30) | Improved by $1.85 |
| Adjusted EBITDA | $135.4 million | $145.4 million | Down 6.9% |
| Cash flow from operations | $62.6 million | $34.5 million | Up $28.1 million |
| Capital expenditures, including software | $64.5 million | $37.2 million | Up $27.3 million |
Fourth-quarter 2013 net sales were $189.6 million, gross profit was $72.4 million, net income attributable to the Company was $8.7 million, and diluted EPS was $0.27.
MC generated 2013 sales of $674.7 million, gross profit of $289.1 million and operating income of $136.7 million. AEC generated sales of $82.7 million, up 22.0% from 2012, but reported a gross profit of $4.8 million and an operating loss of $3.0 million.
Liquidity, debt and financial position
- Cash and cash equivalents were $222.7 million at year-end, compared with $190.7 million in 2012. Approximately $177.7 million was held by non-U.S. subsidiaries.
- Total debt was $304.5 million, consisting primarily of $200.0 million drawn under a $330.0 million revolving credit facility and $100.0 million of private-placement notes. Net debt was $81.8 million, down from $129.0 million.
- Long-term debt was $300.1 million; current maturities were $3.8 million. Scheduled principal payments include $50.0 million in 2015, $50.0 million in 2017 and $200.0 million in 2018.
- The company reported compliance with all debt covenants. The leverage ratio was 1.78x versus a maximum of 3.50x, and interest coverage was 8.85x versus a minimum of 3.00x.
- The company stated that cash on hand and available credit facilities should provide sufficient resources for foreseeable operations. It estimated $60 million to $75 million of capital spending in 2014.
- Defined-benefit pension plans were underfunded by $35.9 million, and postretirement benefit liabilities were $61.1 million. Estimated 2014 pension contributions and direct payments were $6.4 million, with postretirement benefit payments of approximately $5.1 million.
Material changes versus the prior comparable period
- Consolidated sales were broadly stable, but MC sales declined 2.7% while AEC sales increased 22.0%, principally from LEAP program activity.
- MC operating income declined from $163.9 million to $136.7 million because of lower sales, lower volume-related margins and substantially higher restructuring charges.
- Gross margin declined to 38.4% from 40.1%. AEC recorded $2.3 million of losses from inventory write-offs and profitability adjustments related to legacy programs at its Boerne, Texas facility.
- Operating income improved from the 2012 loss primarily because 2012 included $119.7 million of pension settlement charges. The improvement was partly offset by 2013 restructuring charges of $25.1 million, compared with $7.1 million in 2012.
- The company completed the redemption of its remaining $28.4 million of convertible notes in March 2013, funded with revolving-credit borrowings.
- Safran contributed $28.0 million for a 10% interest in ASC, increasing shareholders’ equity and providing additional funding for AEC’s aerospace activities.
- Backlog declined to $225.6 million in MC from $266.8 million and to $21.7 million in AEC from $33.2 million. Management attributed the MC decline primarily to shorter order-to-delivery times.
- The company commenced a French MC restructuring program expected to eliminate approximately 200 positions. Approximately 150 positions had been eliminated by year-end; remaining costs were estimated at $3 million to $5 million, with expected annual savings of approximately $10 million.
- Cash flow from operations increased despite $29.4 million of cash taxes and $22.4 million of restructuring payments. Capital spending increased substantially, particularly for AEC, whose 2013 capital expenditures were $36.9 million.
Guidance, outlook, commentary and risks
- Management views MC as having relatively flat growth potential but expects global paper and paperboard demand to grow, particularly in packaging, tissue, Asia and South America. The segment remains the company’s primary source of cash.
- Management considers AEC the company’s greatest long-term growth opportunity, but stated that LEAP growth depends on achieving design, testing, production-readiness and manufacturing ramp-up milestones, including the second plant in Commercy, France.
- Fixed-price aerospace contracts create risk that cost overruns, technical issues, contract changes, delayed orders or program cancellations could reduce margins or require loss recognition and write-offs.
- MC faces paper-industry consolidation, declining publication-grade paper demand, product-life extensions, intense price competition and potential additional restructuring.
- Key operating risks include dependence on limited suppliers of carbon fiber and resin for LEAP, petroleum-based raw-material costs, foreign-exchange volatility, global economic conditions, customer credit risk and cybersecurity disruptions.
- The company expects additional 2014 curtailment gains from the French restructuring, but the amount was not determined and was expected to be less than the 2013 gain.
- Asbestos litigation remained outstanding: Albany was defending 4,315 claims as of January 31, 2014, and Brandon Drying Fabrics was defending 7,815 claims. Management did not expect material liability beyond available insurance, but stated that litigation outcomes are inherently uncertain.
- The company reported a pending German tax matter involving approximately $23.9 million of challenged tax benefits; $15.5 million would directly affect earnings if resolved unfavorably, according to the filing.
- The Standish family controlled approximately 53% of combined voting power, making Albany a controlled company under NYSE rules and allowing reliance on certain governance exemptions.
Important facts for investors to verify
- Whether AEC achieves LEAP production, plant-ramp and technical milestones and converts program growth into sustainable positive operating income and cash flow.
- Whether the MC restructuring delivers the expected approximately $10 million of annual savings and whether paper-industry weakness causes further volume or pricing pressure.
- The timing and funding of the $200 million revolving-credit maturity in 2018, scheduled private-placement payments, and compliance with leverage and interest-coverage covenants.
- Whether increased AEC capital spending and working-capital requirements remain supportable from operating cash flow and available liquidity.
- The effect of fixed-price contract estimates, legacy-program write-offs and potential contract cancellations on future AEC earnings.
- The ultimate resolution of asbestos claims, the German tax dispute, other tax examinations and unrecognized tax benefits.
- The availability and repatriation restrictions on foreign-held cash, including potential incremental U.S. taxes if funds are brought onshore.